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Enforcing an award ­contrary to sanctions, an issue of ’public policy’?


The past few years have illustrated with a vast intensity the relevance of international sanctions for an ever expanding number of businesses and sectors. This backdrop has also led to a significant increase in sanctions related disputes, which in turn has led to discussions regarding enforcement of arbitral awards that contravene applicable sanctions.

Violations of sanctions can lead to a wide array of adverse consequences, including civil and criminal liability. The list of trading restrictions is continuously expanding. This is the backdrop to the challenging balancing act market operators are facing between ensuring sanctions compliance and continuing commercial operations, while avoiding legal disputes with counterparties as a result of having taken an overly restrictive approach to sanctions compliance. 

Arbitral awards are as a starting point valid and binding, and should be complied with. However, the arbitral award may mandate that a party undertakes a transaction that the arbitral tribunal wrongfully has found not to be a contravention of sanctions, or that has become prohibited by sanctions after the award is rendered, or enforcement may be sought in a jurisdiction other than that of the law of the contract or the seat of arbitration. In such instances, the party obliged by the award may be in breach of sanctions by complying with the award, in turn risking civil and criminal penalties. The party may, therefore, wish to oppose enforcement of the award.

Can sanctions compliance amount to ‘public policy’?

Under the New York Convention [United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958)], Article 5 (2) (b), the recognition and enforcement of an arbitral award may be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of that country. (Most international arbitration conventions and national arbitration statutes are modelled on this provision, including Norwegian law.) What constitutes ‘public policy’ is narrowly construed; it is commonly not sufficient that the arbitral award runs contrary to mandatory laws and regulations. Generally, the ‘public policy’ argument is meant be used to set aside an award or refuse its enforcement if it breaches fundamental rules or principles of a material or procedural nature. Enforcement may only be denied where it would violate the forum state’s most basic notions of morality and justice [See for example Parsons & Whittemore Overseas Co., Inc. v. Sociéte Générale de l’Industrie du Papier (RAKTA), U.S: Court of Appeals, 2d Cir., Dec. 23, 1974, 508 F.2d at 973-974 and IPCO (Nigeria) Ltd v. Nigerian National Petroleum Corp. [2005] EWHC 726], which should not be equated with the state’s foreign policy. This strict approach recognises the finality of arbitral awards, and is internationally adopted.

This gives rise to the question of when rules on economic sanctions and restrictive measures are sufficiently fundamental to be considered ‘public policy’, paving the way for a refusal to enforce arbitral awards in breach of them. In Eco Swiss [C-126/97] the Court of Justice of the European Union stated that the current Article 101 Treaty on the Functioning of the European Union (TFEU), prohibiting anti-competitive behaviour, constituted a fundamental provision for the functioning of the EU internal market, thus being EU public policy. This has been repeated in later case law. As such, it may well be argued that EU sanctions should be treated in the same manner – at least as a starting point – within EU member states [See e.g. Government & Ministries of the Republic of Iraq v. Armamenti e Aerospazio SpA et al. and CAM Case No. 1491, Award of the Chamber of Arbitration of Milan, 20 July 1992, cited in XVIII Yearbook of Commercial Arbitration 1993 80.] and Norway (where implemented into Norwegian law), since they ‘represent the fundamental objectives and values of the EU’ [Szabados, ‘EU Economic Sanctions in Arbitration’. Journal of International Arbitration 35, no. 4 (2018): 439–462.].

For companies whose assets are primarily located in Norway or the EU, sanctions might therefore prevail in the case of a conflict with the arbitral award. Such companies wishing to make a transaction with a sanctioned party in order to comply with an arbitral award must therefore seek authorisation from relevant authorities to do so (this would also be the case for the settlement of an award). In the absence of such authorisation, companies may resist enforcement of an award by arguing that this would be contrary to public policy, and that enforcement should therefore be refused or postponed until the applicable sanctions are repealed. Indeed, it has been argued that courts of EU member states must apply overriding provisions such as EU sanctions ex officio, i.e. without the parties needing to raise the objection [Kunda, Internationally Mandatory Rules of a Third Country in European Contract Conflict Laws (Rijeka Law Faculty 2007) 132 and Otelnikov, ‘Economic sanctions, arbitrability and public policy’. International Arbitration Law Review (2020), 19–30]. 

Whether this is the case also outside Norway or the EU, or indeed for sanctions imposed by other regimes, must be subject to further scrutiny. By way of illustration, in a judgment from the Paris Court of Appeal, Sofregaz v. NGSC [Decision No. 19-07261 of June 3, 2020], a distinction was made between UN and EU sanctions on the one hand and US sanctions on the other. The court held that UN Security Council Resolutions and EU sanctions regulations could form part of international public policy, since they were intended to contribute to international peace and security, although unilateral US sanctions did not. For an arbitral award to be set aside on such grounds, the court stated that a violation of international public policy must be concrete and effective. Hence, the case illustrates that courts need to assess the merits of each case to conclude on whether the enforcement of the arbitral award would indeed constitute a clear violation of any applicable sanctions and ‘public policy’. 

Whether or not an arbitral award mandating a transaction to an entity or individual sanctioned by the EU will be enforced, will vary from jurisdiction to jurisdiction. Key factors to consider are the relevant jurisdiction’s public policies and recognition of the sanctions in question, whether the sanctions are imposed by international bodies or unilaterally, and whether the enforcement of the arbitral award would manifestly violate sanctions. While EU sanctions may be given prevalence by courts in Norway or the EU the question is largely unresolved, and companies with assets in countries outside the EU may find that an arbitral award may be enforced by seizure of these assets, even in the event that the arbitral award is not enforceable in the EU. 

Profile image of Aadne M. Haga
Aadne M. Haga
E-mail aha@wr.no
Profile image of Tine Elisabeth Vigmostad
Tine Elisabeth Vigmostad
E-mail tvi@wr.no
Profile image of Aksel Kolstad
Aksel Kolstad
E-mail ako@wr.no
Profile image of Mads K. Haugse
Mads K. Haugse
E-mail mau@wr.no

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